L3Harris Technologies [LHX] last Thursday reported a loss in its third quarter largely due to a hefty impairment charge and also due to ongoing macroeconomic factors plaguing the U.S. and global economy.
The goodwill impairment charge of $802 million, $4.16 earnings per share (EPS), followed a review of the company’s businesses as part of its annual strategic planning and found two legacy L3Technologies units that are on “the lower end of the portfolio from a growth perspective” as they relate to Defense Department budget priorities, Michelle Turner, L3Harris chief financial officer, said during the company’s earnings call last Friday.
The net loss in the quarter was $350 million $1.56 EPS, versus $542 million ($2.39 EPS) of net income a year ago. Adjusting for the charge and other costs related the merger between Harris Corp. and L3, adjusted earnings increased a nickel to $3.26 EPS, 13 cents short of analysts’ estimates.
Sales in the quarter were flat at $4.2 billion, although organic growth was 3 percent, more than offsetting revenue lost from divestitures. So far in 2022, L3Harris has generated “several hundred million” in sales in support of Ukraine’s war against Russia, Christopher Kubasik, chairman and CEO of L3Harris, said on the call.
L3Harris had expected a contract to be signed late in the third quarter for an aircraft missionization program in the Middle East that’s worth 2 percent to the top line for the year, Kubasik said. He said the failure to sign the contract is due to “geopolitical” events and he didn’t say when it might be signed.
Supply chain disruptions, labor attrition and inflation were all challenges for the company in the quarter, just as with the rest of the defense industry. Supply chain disruptions, particularly related to electronic components, lowered sales by $70 million in the quarter, L3Harris said.
Turner highlighted that 25 percent of the company’s portfolio only recognizes sales when a product is delivered, noting that radios can’t be delivered until all the parts that make them up are supplied to L3Harris and put together in a finished product.
Kubasik, describing the challenge in detail, said L3Harris delivered 8,000 manpack and 4,000 handheld radios in the quarter, each with 10,000 and 5,000 parts, respectively.
“The bottom line is we needed 100, 100 million parts to deliver those 12,000 radios,” he said. “So, we monitor this on a daily basis. I would say we get 97 and a half percent of the parts in. As I said in my prepared comments if you don’t have all the parts, you can’t deliver a radio. You can deliver an airplane with missing parts. You can deliver a ship with missing parts. You can deliver a lot of things with missing parts but you can’t deliver a radio or arguably night vision goggles or cameras.”
Adjusted free cash flow in the quarter was $546 million and for the year is expected to be around $2 billion, about $100 million to $130 million lower than the prior outlook.
Sales for 2022 are forecast to be around $16 billion, down from the previous outlook of between $17.3 billion and $17.7 billion. Earnings are expected to be between $5.80 and $6.05 EPS versus prior guidance of between $10.75 and $11.05 EPS.
Orders in the quarter were a record at over $5 billion, representing a book to bill of nearly 1.2 times sales. The orders were driven in part by multiple prime contract awards, including $3 billion for U.S. Special Operations Command’s Armed Overwatch program, $800 million for the Space Development Agency’s tracking layer, and $400 million for an integrated Navy sensor and fire control system.
These wins demonstrate L3Harris’ success as a non-traditional prime contractor, Kubasik said.
Backlog at the end of the quarter stood at $21.4 billion, up a percent from $21.1 billion a year ago.